HSAs have layers of tax-advantages and uses, making them an ideal savings account

A question I receive often is… where should I put my next dollar? The answer, of course, depends on the person’s upcoming cash obligations and goals. However, in many situations, I find an HSA is a great choice and often overlooked. To some degree I think it’s because they’re conflated with Flex Savings Accounts (FSAs). FSAs are a “use it or lose it” vehicle that provides tax-deductible contributions if the funds are used for medical-related reimbursements. But their big drawback is if you don’t use your contribution within the same year – you lose it. The only recent exception has been related to COVID. Health Savings Accounts (HSAs) are different in that contributions don’t have a time limit for use, are portable if you leave your employer, and can be invested. 

From IRS:

You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).

Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

The contributions remain in your account until you use them.

The interest or other earnings on the assets in the account are tax free.

Distributions may be tax free if you pay qualified medical expenses. 


It’s the tax-trifecta!

Now that the pressure of using the funds in a single year are set aside, the question becomes, what qualifies as a medical expense?  
  • Deductibles, co-pays, co-insurance, prescriptions, dental, vision
  • Over-the-counter medication (woo-hoo, that wasn’t always the case!)
  • Menstrual products (Yasss!! Definitely not always the case!)
  • Long-term care insurance premiums
  • COBRA premiums or premiums paid while on unemployment
  • Medicare premiums
In conclusion, when I run a plan, I’m often factoring in the cost of Medicare and long-term care. The fact that these tax-advantaged accounts can be invested makes the case that the contributions should be held for future use to the extent your cash-flow allows. Maybe the funds are used to help you through a tough time (ie, to cover premiums and qualified purchases during unemployment). Maybe we’re having a tough time figuring out how to bridge the gap of your current spending with the projected expense of assisted living way down the road, a gap that LTC insurance could fill. But let’s be honest, the premiums for LTC aren’t cheap, especially if you’re a single woman. Saving to an HSA well ahead of time could be your answer so you’re better prepared to afford a policy when it’s time to apply in your 50s-60s. 


Free Resource: Download my guide on HSAs.